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Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

The Market

    The indices (DJIA 12301, S&P 1317) had a rough day.  Nevertheless, both closed within their intermediate term up trends (12237-15655, 1294-1713).

    However, the DJIA confirmed the break of its short term up trend, re-setting to a trading range thereby joining the S&P.  Looking at the charts the upper boundary of the new trading ranges we know; they are the recent highs (12866, 1368); however, there is no clearly visible lower boundary.  The initial logical choice would have been the 12405, 1345 support level, but both indices have taken those out.  Now I am watching the shoulder line of the recent inverse head and shoulders (11995, 1293) and the lower boundary of the intermediate term up trends (12237, 1294).  Given the lack of clarity, all we can do is sit back and watch.

    Volume was weak; breadth quite negative.  The VIX was up strongly but remains within its trading range--thus providing no assistance on the future direction of the Market.

    GLD had a decent day; but only good enough to remain right on the ascending lower boundary of the old short term up trend.

    Bottom line: it would appear that the underlying momentum in stock prices has diminished.  The extent of the loss is the big question now--the answer to which we have to wait on.  In the meantime, there is certainly nothing technical that would prompt any Buying at this point, i.e. none of our stocks have declined to any major support level, indeed, as you know from our more recent trades,  several have broken support.  So my attention is on the Sell side and our Stop Loss prices. 


    Investor attention was focused on international developments yesterday:

(1)    the EU is struggling with the Greek debt problem and it looks increasing like there will be a default/restructuring.  That means big losses for the banks; and our own recent experience with that suggests some pain in the offing.  Making matters worse, S&P downgraded the credit rating of Italy and Fitch the credit rating of Belgium.  This story is not going away and is likely only to get worse.
               This chart provides an idea of the extent of EU bank exposure to Italy:

(2)    production stats from two major economies--China and Germany--came in below expectations.  Coupled with the potential fallout from EU sovereign debt problem, this raises fears that global growth may be slowing and that a ‘double dip’ could be back on the table.  I think it way too soon to make that call.  So I don’t see getting beared up over these latest numbers.

However, that is not to say that the rest of the world is not experiencing a below average secular growth rate, characterized more or less by a sluggish erratic expansion.  So the aforementioned disappointing production numbers shouldn’t come as a surprise.  That said what may be below average secular growth for China, India, Brazil, etc is an order of magnitude higher than that of the US.  In other words, sluggish for the US is 1-2% real growth; but sluggish for China may be 6-7% growth.  The point being these countries even in a tough economic environment will see growth the US can only dream of.

    Bottom line: the fundamentals continue to suggest that stocks at current price levels are, in general, overvalued.  The good news is that they are less overvalued than a week ago.  Any further downward momentum and test of the lower boundary of the Averages intermediate term up trend would put equities roughly at Fair Value and could provide a Buying opportunity.  


   This Week’s Data




    The latest from David Stockman (long but worth the read):

Posted 05-24-2011 8:18 AM by Steve Cook
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